Dynamic Matching and Allocation of Tasks

TL;DR

This paper develops a dynamic matching mechanism for long-term, patient two-sided markets with incomplete information and moral hazard, ensuring optimal performance and stability in equilibrium.

Contribution

It introduces a novel dynamic matching mechanism that promotes learning and prevents moral hazard, achieving optimal and stable long-term matches.

Findings

Mechanism ensures optimal revenue in equilibrium.

Equilibrium strategy is long-run coalitionally stable.

Mechanism facilitates learning before final matches.

Abstract

In many two-sided markets, the parties to be matched have incomplete information about their characteristics. We consider the settings where the parties engaged are extremely patient and are interested in long-term partnerships. Hence, once the final matches are determined, they persist for a long time. Each side has an opportunity to learn (some) relevant information about the other before final matches are made. For instance, clients seeking workers to perform tasks often conduct interviews that require the workers to perform some tasks and thereby provide information to both sides. The performance of a worker in such an interview- and hence the information revealed - depends both on the inherent characteristics of the worker and the task and also on the actions taken by the worker (e.g. the effort expended), which are not observed by the client. Thus there is moral hazard. Our goal is to derive a dynamic matching mechanism that facilitates learning on both sides before final matches are achieved and ensures that the worker side does not have incentive to obscure learning of their characteristics through their actions. We derive such a mechanism that leads to final matching that achieve optimal performance (revenue) in equilibrium. We show that the equilibrium strategy is long-run coalitionally stable, which means there is no subset of workers and clients that can gain by deviating from the equilibrium strategy. We derive all the results under the modeling assumption that the utilities of the agents are defined as limit of means of the utility obtained in each interaction.